Dozens of tax avoiding firms are being allowed to use charity rules to avoid
tax, MPs have told the charities watchdog.

Margaret Hodge MP, the chairman of the Public Accounts Committee, criticised the Charity Commission for not doing its job properly and being tougher with charities which were avoiding tax.

She said the MPs and National Audit Office, which is poised to announce an investigation into the work of the Commission's regulatory role, had found evidence that 50 organisations were dodging their fair share of tax by registering as charities.

She said: “We think there are 50 organisations that we know of where charities are being used really as tax avoidance mechanisms... Why are you not doing more than just regulating?”

The MPs expressed surprise that the Cup Trust, a Uk-registered charity which has raised £176million in two years, had been allowed only to hand out grants to youth charities of just £55,000 over the past two years.

The committee heard the Cup, which has a trustee based in the British Virgin Islands, could recoup as much as £46million in gift aid. Mrs Hodge said this was “an absurd abuse of charitable status”.

Fiona MacTaggart MP demanded to know how the commission could have satisfied itself that the Cup Trust was satisfying a public benefit, as it has to in law. She said: “Nobody in their right mind could call this a charity. The charity has to be for public benefit.

“What you are saying is that public taxes are stolen by a private company based in the Virgin Islands and then gives to two other charities. Does that seem like a public benefit?”

The MPs criticised the Commission for a near collapse in the number of charities and trustees that it had investigated in recent years.

Figures from the Commission’s website which showed that it not one trustee had been banned from working with charities in the past three years.

Despite fraud among charities running at more than £1billion, the MPs were told that only one trustee had been suspended every year for the past four years. Tory MP Stephen Barclay said he could not “see what actual enforcement” the Commission was doing.

Defending the commission, William Shawcross, its chairman, said that Government cuts had made it harder to investigate charities.

He described the Cup Trust saga as “a terrible, terrible story” but it was important to differentiate between the charity and its tax scheme.

He said the Commission would be “very assiduous” in ensuring that if the Cup Trust claimed back £46million in gift aid it would be spent on charitable purposes.

He said: "This whole thing has been a disaster for the charity sector. It has affected public trust and confidence in charities. It is very damaging to the sector and it is very damaging to the Charity Commission that this has happened."

Mr Shawcross disputed the MPs’ claims that 50 organisations were abusing charity law to avoid tax.

He said: “I have no reason to believe that there are 50 such charities like the Cup Trust. If we find 49, 48 or 20 such charities we will investigate them fully. The lesson of this awful story – we are more upset about this than you are.

“It is very damaging to the commission and the charitable world in general. We will co-operate even more closely than we do.”

He admitted that the fact the charity “had a trustee registered in the British Virgin Islands, although that is not illegitimate in any way, should have raised concern”.

The Commission said this afternoon that the figures for suspended trustees did not include the number jailed or disqualified, or those who weremade bankrupt and can no longer be trustees.